Don't overlook the small business health insurance tax credit

From The McGill Advisory Newsletter, April 2011

Last year’s health care reform law (Patient Protection and Affordable Care Act) included a tax credit designed to encourage practices to provide health insurance coverage for their staff. Ironically, the credit is available not only to practices that began providing health insurance coverage to staff members after the law was passed, but also to those who have been providing it for years. However, only practices that pay at least 50% or more of their staff’s health insurance premiums are eligible for the credit.

The maximum tax credit is 35% of the premiums paid by the practice for staff health insurance coverage. This maximum credit is available if the practice has 10 or fewer full-time equivalent (FTE) employees, whose average annual salaries are $25,000 or less. A reduced tax credit is available for practices with up to 25 full-time equivalent employees, and whose average salaries are up to $50,000 annually. Doctors who wish to calculate the projected tax credit available for their practice can go to the online calculator we created.

The tax credit is claimed on the doctor’s practice tax return. For regular “C” corporations, the credit can be used only to offset tax due on the corporation’s federal income tax return. For doctors operating as Subchapter S corporations, Limited Liability Companies (LLCs), or unincorporated partnerships or sole proprietorships, the tax credit will flow through to the doctor’s federal income tax return, where it can be used to offset his regular or alternative minimum tax liability.

With tax laws constantly changing, it’s easy for doctors to overlook new tax-saving provisions. However, I was astonished at recent seminars to find that fewer than half (50%) of the doctors who were eligible to claim the tax credit had done so on their 2010 practice tax returns already filed (tax returns for Subchapter S and regular “C” doctors were due March 15, 2011, unless extended). Doctors can file an amended return if they failed to claim the appropriate tax credit due them when they filed their 2010 corporate return.

Many doctors can expect to receive a small business health insurance tax credit of $5,000 to $15,000 each year from 2010 to 2015. That’s a dollar for dollar reduction in the doctor’s federal income tax liability. That’s way too much money to be overlooked!

Doctors can obtain an immediate cash flow benefit by reducing their federal income tax withholding and/or estimates to take into account the credit otherwise due them. Avoid giving the IRS an interest-free loan, and use the tax credit proceeds to pay off debt and/or invest.

The McGill Advisory is designed to provide accurate and authoritative information with regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought.

Copyright © 2011 John K. McGill & Company, Inc. All Rights Reserved.